PENTAIR PLC Corrected Transcript
10 - 24 - 2023
Pentair plc
Q3 2023 Earnings
Pentair plc
Q3 2023 Earnings
CORPORATESPEAKERS:
Shelly Hubbard
Pentair plc; Vice President of Investor Relations
John Stauch
Pentair plc; President and Chief Executive Ofcer
Robert Fishman
Pentair plc; Chief Financial Ofcer
PARTICIPANTS:
Brett Linzey
Mizuho; Executive Director
Andrew Kaplowitz
Citi; Managing Director
Brian Lee
Goldman Sachs; Chief Risk Ofcer
Bryan Blair
Oppenheimer;Analyst
Michael Halloran
Baird; Associate Director of Research, Senior Analyst
Julian Mitchell
Barclays; Equity Research Analyst, US Industrials
Saree Boroditsky
Je feries; Analyst
Jefrey Hammond
KeyBanc Capital Markets; Managing Director
Andrew Krill
Deutsche Bank; Vice President
Joseph Giordano
Cowen; Managing Director
Scott Graham
Seaport Research Partners; Senior Equity Research Analyst
Jefrey Reive
RBC Capital Markets; Research Associate
Nathan Jones
Stifel; Senior Equity Analyst
Sabrina Abrams
Bank of America; Analyst
Pentair plc
Q3 2023 Earnings
PRESENTATION:
Operator^ Good morning. And welcome to the Pentair Third Quarter 2023 Earnings
Conference . (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Shelley Hubbard, Vice President of Investor Relations. Please go ahead.
Shelly Hubbard^ Thank you, [Anthony]. And welcome to Pentair's third quarter 2023
earnings conference call. On the call with me are John Stauch, our President and Chief Executive Ofcer; and Bob Fishman, our Chief Financial Ofcer. On today's call we will
provide details on our third quarter performance as outlined in this morning's press release.
On the Pentair investor relations website you can fnd our earnings release and slide
deck, which is intended to supplement our prepared remarks during today's call and
provide a reconciliation of diferences between GAAP and non-GAAP fnancial measures that we will reference.
The non-GAAP fnancial measures provided should not be considered as a substitute for or superior to the measures of fnancial performance prepared in accordance with GAAP.
They are included as additional clarifying items to aid investors in further
understandingthe company's performance, in addition to the impact these items and events have on the fnancial results.
Before we begin, let me remind you that during our presentation today we will make
forward -looking statements, which are predictions, projections or other statements about future events. Listeners are cautioned that these statements are subject to
certain risks and uncertainties, many of which are difcult to predict and generally beyond the control of Pentair.
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Q3 2023 Earnings
These risks and uncertainties can cause actual results to difer materially from our
current expectations. We advise listeners to carefully review the risk factors in our most recent Form 10-Q and Form 10-K.
Following our prepared remarks, we will open up the call for questions. Please note that we will limit your questions to two, after which we ask you to then reenter the queue in
order to allow everyone an opportunity to ask questions. A quick reminder before I hand the call over to John.
Similar to last quarter, we have included included Slides Four through Seven in our earnings slide deck, which provide a brief overview of Pentair. Please see the slides
titled Strategic Framework, Pentair at a galnce, Pentair overview and making better essential for more information.
In reference to Slide Seven, making Battery Essential, we are proud to share two recent recognitions that Pentair has received for its work in social responsibility and ESG.
We've been recognized as a constituent of the FTSE for good Index series and we have
been named one of America's Greenest Companies, 2024 by Newsweek. This
recognition from Newsweek evaluated Pentair's environmental performance in relation to our industry, assessing our progress against key and environmental factors, including
greenhousegas emissions, water usage, waste profle and commitment to disclosing sustainability data.
Pentair's achievement supports our purpose to create a better world for people in the planet through smart, sustainable water solutions.
We look forward to continuing to reduce the environmental impact of our operations and further integrate sustainability into our product innovation, as guided by our social
responsibilitystrategic targets. Please refer to our published 2022 Corporate
Responsibility Report for more information on our sustainability strategy. I will now turn the call over to John.
John Stauch^ Thank you, Shelley. And good morning, everyone. Let's begin with the
executive summary on Slide Eight. We are very pleased with our third quarter results,
Pentair plc
Q3 2023 Earnings
which surpassed the guidance that we provided on our last earnings call. Q3 marked the
sixth consecutive quarter of sales over $1 billion and the sixth consecutive quarter of adjusted margin expansion.
Segment income increased 3% and our worth expanded by 140 basis points. Adjusted EPS was $0.94 versus our previous guidance of $0.84 to $0.89. And year-to-date free cash fow was $453 million, up 115% over the prior year.
As we look to the full year, we are updating our 2023 adjusted EPS guidance range to
$ 3.70 to $3.75, which refects the high end of our previous guidance. I want to celebrate these strong results with our employees. Your resilience and dedication to serving our
customers and delivering value for our shareholders during a year of global
macroeconomic uncertainty is making a diference. Thank you for your leadership.
Let's move to Slide Nine, titled Strategic Focus. Through our mission to help the world sustainably move, improve and enjoy water, we are enabling the right investments to
both deliver the core and build our future, to drive long-term value for shareholders. And deliver the core, we have driven proftably proftability and productivity across all 3 segments, Industrial & Flow Technologies, Water Solutions and Pool in 2023.
We have also been making better essential through our products and solutions for
people in the planet with a focus on sustainability, and we have been investing in our
people to develop talent and build a higher performing culture. Another strategic focus of ours is to build our future to accelerate performance.
In 2023, we have further invested in transformation, innovation and M&A. In fact, we
have seen great results across all three of these areas with our transformation having begun to read out and new innovation launch this year with exciting new products
coming in all three segments. And our Manitowoc Ice acquisition is exceeding expectations.
Regarding innovation, in 2023, our businesses have launched 25 new products.
Examples include, a new high-efciency icemaker for convenience stores and fast casual restaurants, designed in advance to meet the future EPA regulation for refrigerants.
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Q3 2023 Earnings
Expansion of our ENERGY STAR award winning and Smart IntelliFlow 3 pump series, and the advancement of our beer membrane fltration solutions to operate continuously with higher levels of smart automation. In addition to these new product launches, our
innovation teams continue to make great progress advancing our strategy to build our future as they focus on our longer-term growth theme centered on the Pool of the
future, reimagining residential commercial water treatment and industrial waste-to-value solutions.
Over the last three years, we have launched over 100 new products. Let's turn to Slide 10 titled Transformation Updates. We embarked on this transformation journey nearly two years ago, with the intent to transform our business for the Pentair of the future. Our company has evolved substantially with the separation of nVent and then evolving to a leading diversifed water company.
Through our four key transformation themes, including pricing, sourcing, operational excellence and organizational efectiveness, we are streamlining our processes and
building additional capabilities, which add more tools in our toolbox to drive growth and productivity.
In Q3, Transformation gained momentum and drove a substantial increase in
productivity,sequentially from Q2. After implementing Wave 1 in both pricing and
sourcing, we expect the Transformation to begin to scale in the second half of this year, and we are pleased to note that our transformation initiatives remained on track.
Let's turn to Slide 11, titled CEO [Submarine]. We delivered another strong quarter with signifcant ROS expansion. Our Manitowoc Ice acquisition continued to exceed
expectations. Our IFT and Water Solutions segment more than ofset Pool's volume decline and our transformation initiatives drove margin expansion.
Our performance through Q3 resulted in another positive update to 2023 adjusted EPS
guidance . All in, we are building a strong foundation to drive long-term growth and
proftability, across our Diverse Water portfolio. We have updated the full year adjusted EPS guidance to a range of $3.70 to $3.75, from the previous range of $3.65 to $3.75.
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Q3 2023 Earnings
We are mindful of the uncertainty across the global macroeconomic and geopolitical
landscape and we continue to closely monitor macroeconomic developments and implement risk mitigation strategies when and where necessary.
We have continued to accelerate transformation funnels while focusing on investing in the long-term growth of our company. We remain confdent in our diversifed Water Business model, long-term strategy and our transformation initiatives, which we expect to continue to drive shareholder return.
We have a long successful track record of generating strong cash fow and being
disciplined with capital allocation. We achieved 47 consecutive years of dividend
increases and are targeting high teens ROIC. We have a strong balance sheet and an
enviable fve-year fnancial track record. I will now pass the call over to Bob, who will discuss our performance and fnancial results in more detail. Bob?
Robert Fishman^ Thank you, John, and good morning, everyone. Let's start on Slide 12,
titled Q3 2023 Pentair Performance. We delivered another strong quarter of signifcant margin expansion, despite sales being down 4% year-over-year.
The diversifcation of our portfolio and our transformation initiatives continued to more
than ofset Pool's lower volume impact on margins. Core sales for Q3 were down 7% year -over-year, driven by our residential businesses. Our commercial and industrial businesses performed well in the quarter.
While Q3 sales declined primarily due to the volume headwind in Pool, the negative volume impact on Pentair and Pool improved sequentially from Q2. Third quarter
segment income increased 3% to $212 million and return on sales expanded 140 basis points year-over-year to 21%.
This improvement was driven primarily by productivity from Transformation, accretive margins from the Manitowoc Ice acquisition and some price versus cost beneft. We
delivered adjusted EPS of $0.94. Net interest expense was nearly $29 million and our adjusted tax rate was 15% during the quarter with a share count of $166.6 million.
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Q3 2023 Earnings
Please turn to Slide 13, labeled Q3 2023 Industrial & Flow Technologies performance.
Industrial & Flow Technology sales increased 3% year-over-year driven by commercial
sales growth of 8% and industrial sales growth of 12%. Which more than ofset a decline in residential sales of 7%.
Segment income grew 18% and return on sales expanded 250 basis points to 19.4%, marking the ffth consecutive quarter of equal to or greater than 200 basis points of
improvement. The strong margin expansion was a result of continued progress on our transformation initiatives.
IFT's continued success was partly driven by a revised go-to-market strategy and industry leadership that has been underway over the last two years. For example,
within our industrial businesses, our strong reputation and industry expertise is driving above industry growth. We've been moving away from primarily project-led business to
standardizedsolutions, focused on ease of doing business with distributors and our key accounts have begun to reinvest in sustainable product lines following the pandemic.
Within our commercial businesses in IFT, we are focused on driving business beyond
warehousesand ofce space to data centers and institutions, such as universities, airports, hospitals, and government buildings. We also believe there are large
opportunitiesin municipal infrastructure as driven by the Infrastructure Investment and Jobs Act Legislation in the U.S. with a focus on investments in clean water, food control and broadband.
Interestingly,one of our customers is the leader in directional drilling equipment for
fber optic cables. We continue to believe the aftermarket is a good opportunity for future growth, because of our signifcant product installed base.
Lastly, we believe we are in a strong position to beneft from the Build America Buy
America Act as our compliance is expected to give us a strategic advantage. Within our
residential businesses and IFT, we have seen a return to normalization. Recall that these
products are typically not a discretionary spend. When a sump pump or a well pump brakes, it's critical to get it fxed.
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Q3 2023 Earnings
Please turn to Slide 14, labeled Q3 2023 Water Solutions Performance. In Q3, Water
Solutions sales increased 9% to $299 million, driven by our Manitowoc Ice acquisition and price. Segment income grew 40% to $69 million and return on sales expanded 510
basis points to 23%, driven primarily by our accretive Manitowoc Ice acquisition and productivity from our transformation initiatives.
Margins have expanded over the last seven quarters, from 10.8% in Q1 of 2022 to 23% and in Q3 of 2023. Within our Residential Business and Water Solutions, we noted last
quarter that we are seeing North America stabilize. This was evident in Q3, as residential sales decline improved sequentially from Q2.
Within our Commercial business and Water Solutions, fltration sales in North America remained strong. And Manitowoc Ice continued to exceed our expectations. Please turn to Slide 15 labeled Q3 2023 Pool Performance.
In Q3, Pool sales declined 21% to $309 million. The volume decline of 28 points was
primarily due to continued channel inventory corrections in the quarter. And refects a
strong Q3 2022 comparison. Sequentially, the negative impact of volume signifcantly improved from Q2.
The pricing beneft of 7 points helped partially ofset the volume decline. Despite lower Pool sales in Q3, return on sales expanded 130 basis points, due to price ofsetting
infation, prior actions to rightsize direct labor to align with lower volumes and improved productivity driven by our transformation initiatives.
Please turn to Slide 16, labeled transformation initiatives. Similar to last quarter, we
believe this slide provides a good illustration of our transformation initiatives and our
ultimate goal of driving margin expansion. For reference, our transformation initiatives focus on four key themes, pricing excellence, strategic sourcing, operations excellence and organizational efectiveness.
As we've mentioned in past quarters, we expect strategic pricing actions to beneft the top line of all three of our segments. We expect our other 3 transformation initiatives to help improve our overall cost structure. As a result, we are targeting ROS of
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Q3 2023 Earnings
approximately23% by the end of fscal 2025. Expanding margins over 400 basis points as compared to fscal 2022.
Please turn to Slide 17, labeled Transformation Runway. As you look at each of the 4 key
themes, you can see that the work within these transformation initiatives is in various
diferent stages. For example, in 2023, we have begun to see early readouts from wave 1
within pricing, sourcing and operations. We are beginning Wave 2 within each of these 3 themes and expect margin benefts to read out in 2024.
You can see how each new wave is expected to compound on the others to drive expected margin expansion year-over-year through 2025 and beyond. In Pricing
Excellence, the strategic pricing playbook has been developed, which is just beginning to roll out across segments and categories. For example, in Q3, we began to implement strategic pricing actions across select products within our Pool segment.
Within these price actions, while these price actions are refected in our recent annual
price increase. Please note that these strategic actions difer from annual price
increases. Typically, on an annual basis, we evaluate overall infation, both material and cost to determine the appropriate price increase across our products.
With regards to strategic price actions, we are evaluating all products through a
value-based model and identifying which ones have opportunities for adjustments.
Recall that in the past, we primarily evaluated pricing through a cost-plus approach. In Sourcing Excellence, the implementation of Wave 1 is underway with savings currently
reading out. As a reminder, Wave 1 included materials such as electronics, motors, maintenance, repair and operation spend, packaging and logistics.
Additionally,we successfully kicked of Wave 2 this summer with over 800 suppliers
attending our supplier show. For reference, Wave 2 materials include metals, molding, resins, ocean freight and purchased fnished goods. We expect Wave 2 to begin to read out beginning in 2024. Incremental to our strategic sourcing waves, we have seen
beneft from our rapid renegotiation process, that is a part of our transformed sourcing excellence work.
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Pentair plc published this content on 26 October 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 26 October 2023 15:29:06 UTC.
